Monthly Archives: March 2008

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“All religions are just as good as each other, as long as the people who practice them are honest, and even if Turks and heathens came and wanted to populate this country, then we would build mosques and temples for them”(1)

I was going to do a rather obnoxious post about the Macedonian name issue, but decided not to. You can see a draft of it in the comments section over here.

Meanwhile, here’s an idea I’ve sometimes toyed with: a series of posts on the leaders of small European countries during the Second World War. There were some fascinating characters running around then: Admiral Horthy of Hungary, Salazar of Portugal, Prince Paul of Yugoslavia and Ante Pavelic of Croatia. (Pavelic not so much fascinating as disgusting, but that’s a story for another time.)

Anyway, I don’t want to commit myself to this — I still have the series on frozen conflicts half-finished — but here’s a random post on one wartime leader: Marshal Antonescu of Romania. Continue reading →

It’s shaping up to beÂ an important week in Ireland for the prospects of Treaty of Lisbon ratification.Â Â As EU-watchers know, Ireland is the only country planning to ratify the treaty by popular referendum (although events in Poland could add a referendum there too).Â While the treaty should in theory have little problem passing, there’s a history of hiccups going back to the initial rejection of the Maastricht treaty by the public before they were persuaded to reconsider.Â But the backdrop is getting more ominous for this one.

The Zimbabwean opposition is claiming victory on a monster turnout in the elections there, although this may be part of a strategy to pre-empt government rigging by claiming early and often. It would be nice if this was it, but I’m sceptical, of course.

Especially, the presence of ex-finance minister Simba Makoni as a candidate worries me; it would be too easy to stage a Russian-style virtual politics candidacy that sucks up opposition voters and then vanishes, leaving Robert Mugabe the last man standing. You can track the world’s most depressing Google Maps mashup here.

Hungarian intellectuals are protesting against the owner of the newspaper Magyar Hirlap, after the paper started printing some genuinely shocking anti-semitic opinions. Specifically, its new columnist Zsolt Bayer took it on himself to describe “the Budapest Jewish journalists” as “justification Jews; their mere existence justifies anti-Semitism”. That’s pretty ugly; it doesn’t help that the trope about Budapest Jewish journalists is an old extreme-right standard that reaches back before the Second World War, and which was pulled out of the rhetorical shed, oiled, and sent back out on the track after 1989 to attack the rootless cosmpolitans, etc, who supposedly characterised the revolutionaries.

It doesn’t help that the newspaper involved has had its political line flipped through 180 degrees since 2005, when Gabor Szeles bought the paper and sacked the editorial team, bringing in people like Bayer instead.

Meanwhile, round the corner in Austria, the head of one half of the FPO, Hans-Christian Strache is trying to draw attention to himself by leaping into bed with, ahem, the vice president of the Serbian Radical Party and a bunch of maniacs from Bulgaria. Why for such a mess? It seems he wants to prevent the decline and fall of Europe.

As a patriotically thinking person, I respect anyone who is conscious of their homeland, wherever they come from. Kosovo has seceded against international law. Therefore, I support the Serbs’ just cause in this question and maintain contact with Mr Nikolic, who is as little right-radical as Mr Sidorov. I’m not scared of contagion, quite the contrary. I believe that Europe’s patriot, whether Serbian, Croatian, or French, have recognised one thing; the decline and fall of Europe can only be prevented together. We are heading for a dissolution of the diversity of cultures in the soup of European unity; European patriots have recognised this.

His plans to head off the decline and fall of Europe include having mosques, but only so long as they don’t have minarets or muezzins.

The good news, of course, is that he’s waving his arms from the comfort of political irrelevance.

I am happy to be back here at AFOE with a guest post. For those of you don’t know me my name is Claus Vistesen and I write regularly from my personal blog Alpha.Sources. In my writings I usually stay within the comfortable world of the dismal science and this post is no exception. Today’s topic is Iceland and the probability that she will be the first real macroeconomic fallout (if any) of the much debated credit market turmoil which has gripped financial markets since August 2007. Since I posted this over at my own blog many others have been moving in with interesting observations on Iceland. Most notably I would like to draw your attention to one of Brad Setser’s recent posts in which he constrasts the Icelandic situation with the US ditto.

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I am sure that most of AFOE’s readers are aware that Iceland, to a somewhat greater extent than the rest of us, are subject to the forces of nature. Being severed by the mid-Atlantic ridge which is a constructive tectonic plate margin cutting across the Atlantic ocean is consequently not for the faint of hearts. In modern times the skirmishes of Surtsey 1963 and Heimaey 1973 are omnious cases in point. As far as I am informed the tectonic activity in Iceland is relatively subdued at the moment but that, as we shall see, does not mean Iceland is not faced with a potential eruption. This time only, Iceland is subject to the equally potent forces of global financial markets rather than the whims of mother nature. In many ways, the sudden return by Iceland to the spotlight is not surprising. As early as in the Spring of 2006we discussedwhether Iceland were among the first in line to suffer a blowout on the back of an abyss deep current account deficit driven by a housing and consumer credit boom and a subsequent vulnerable currency. Over at my own blog I have, since the credit turmoil began, been looking wearily towards the Eastern European edifice for the first potential macroeconomic fallout in the context of what we could call emerging economies. I still am but given the most recent events it could indeed seem as if Iceland is about to beat the collective of the CEE and Baltic countries to it. At the heart of the debacle in Iceland lies the same kind of imbalance as we are currently observing in the US as well as other countries around the globe. A large current account deficit coupled with high inflation at a time when the housing bubble and consumer credit boom is about to come to a very abrupt standstill are all ingredients which we should be well aware of at this point. As can be expected this has also taken its toll on the financial sector which has played a seminal role in the recent Icelandic expansion. In this way, Iceland’s three largest banks (Kaupting, Glitnir, and Landsbanki) have all seen their credit rating being scythed by the rating agencies recently. In one of their recent much appreciated daily digests Eurointelligence reports how credit default swaps have risen to alarming levels even if we should note that the three big Icelandic banks have branches in mainland Europe allowing them to potentially knock down the ECB’s door for liquidity.

(…) the FT reports that credit default swaps for Icelandic banks have risen to extreme levels, for example to 912bps for Kaupthing. The article also makes the piont that Icelandâ€™s three top banks, Kaupthing, Landsbanki and Glitnir, have branches in mainland Europe, which means they can tap the ECB for funding.

The rather precarious situation of the Icelandic economy recently prompted the central bank into pulling a reverse Bernanke as it was decided at an emergency meeting to raise the main refi rate by a healthy 1.25% bringing it to 15% in total. The immediate impetus for the move were indeed the global financial turmoil and by derivative the fact that the Icelandic krone had, in the past weeks, taken a flogging which would make the buck look like Cassius Clay in his prime. In the original post over at Alpha.Sources I field a chart which provides a sniff of the situation at hand as it shows the nominal exchange rate of the EUR/ISK as an index with 2.1.2006=100. As can be observed the recent weeks’ turmoil have more than halved the nominal value of Iceland’s currency vs the Euro. Yesterday the FT furthermore reported how the central bank and the government would move in tandem to shore up short term market liquidity, in part, by issuing â‚¬80m worth of short-term bonds. Whether this will work as a remedy to hold off the immediate crisis is basically impossible to tell. At the moment the only thing we can really do is to sit back and look where it will pop first. In the short term Iceland, with its floating currency, obviously seems more inclined to go to the pillory than many Eastern European countries who have pegged their currency to the Euro. We should however, in this context, never let our glance stray away from Hungary who recently was ‘forced’ to lift its trading band on the Forint. Over at the Hungary Economy Watch Edward and me are following the situation closely. We could also, I think, ask with some validity whether it is really such an advantage for many of the Eastern European countries to have married themselves with the Euro in the sense that this was done in first place on the expectation of future membership of the EMU. At this point this consequently seems all but a fool’s hope for most of the countries in question I would argue.

I don’t think it would be timely at this point to downplay the potential fallout facing Iceland and as Macro Man aptly noted a while back; you cannot spell risk without ‘ISK.’ As always in these kind of situation the main risk is that markets call the authorities to the poker table in which case the central bank’s reserves are certain to be drained faster than many investment banks’ balance sheets are currently being re-furnished. Given the size of the Icelandic economy such a move would likely be nasty, brutish and short. I don’t know whether all those loans in Iceland are denominated in Euros which would clearly represent a substantial degree of translation risk but even without this issue the situation is still getting increasingly more precarious. Obviously, not all view it this way and we would be well advised to pay attention to the following as quoted from the FT …

Richard Portes, president of the Centre for Economic Policy Research, and the author of a respected report on Icelandâ€™s economy last year, has urged investors to pay more attention to the data. He points out overheating is being tackled, with economic growth slowing, hitting 2.9 per cent in 2007 and zero this year. He adds that Icelandâ€™s current account deficit â€“ the source of many of the concerns about the economy â€“ has narrowed from 26 per cent of GDP in 2006 to 16 per cent in 2007. He has also made clear that Icelandâ€™s banks are sound by international standards, with deposit ratios in line with international norms, high capital adequacy ratios by European standards and credible funding profiles. Finnur Oddsson, managing director of the Icelandic Chamber of Commerce, said: â€œThe global turmoil is certainly hurting the financial sector, but the danger of things toppling over here is greatly exaggerated.â€

What we have here is analogous to the debate we are having in the context of Eastern Europe and whether the landing will be hard or soft? Definitions as always are important here but it is obvious for anyone with a basic understanding of macroeconomics that having a floating currency also yields to potential of actually correcting the external balance without resorting to deflation something which the Baltics et al. may soon realize. Obviously, the flipside as should be clear from the oveview presented above is that the correction is too swift thus bending the stick so far that it ultimately break. Moreover, and as we are seeing in Hungary the traditional correction by which an undervalued currency boosts exports is not likely to cut it if inflation stays high (i.e. eroding the competitiveness) and the income flows on the current account pulls the balance further down as a result of an overweight of foreign owned domestic assets relative to domestic investors’ foreign assets. Whether this applies to Iceland is dubious. More than anecdotal evidence suggests that Icelandic investors and money men have been active in particularly Scandinavian asset markets. Moreover, and if you accept the fact that Hungary’s and indeed the whole Eastern European situation has something to do with the fact that these countries have moved (still moving actually) through the demographic transition far quicker than the traditional economic development process has been able to keep up I think we have a good basis for analysis. This thus leads me to the point I should perhaps have started with, namely a long term and structural assessment of the Icelandic economy. You should not worry though as I have all my bases covered. It would thus serve us well to go back to May 2007 and have a look at my colleague Edward Hugh’s piece on Iceland posted at Global Economy Matters. In this note, Edward indicates why any worry about Iceland in the long term and from a structural point of view seems to be largely unfounded even if of course the imbalances themselves run the risk of causing an abrupt crisis. In fact, Edward lifts a quote from the Economist Intelligence Unit where the specific risk from financial markets and potential spillover effects into the currency with a subsequent wage-inflation spiral to follow are mentioned. This would then be where we are situated now but allow me still to quote Edward in his final remarks …

So is this really so bad as it seems? Well let’s revisit an argument Claus advances in his recent French post, which is that if some countries with high median ages are now structurally tied to dependence of exports for growth (and sustainability in their public finance), then logically other countries (with somewhat lower median ages) are going to need to run ongoing trade deficits. Claus was referring to France in its ongoing relationship with Germany, but the argument could easily be extended to Iceland and points further afield. Iceland still has a median age of around 34 years, which makes it a very young country in developed economy terms. So if we can apply Modigliani’s Life Cycle Hypothesis to populations in the case of the elderly economies (Japan, Germany, Italy, Finland etc), why shouldn’t we apply the same notion to the relatively more juvenile economies, who can with some greater realism accumulate liabilities now which can be paid off later, as the population ages and domestic saving increases? I know this as all somewhat politically incorrect, but I do worry just exactly what would be the impact on overall economic welfare of all the younger median age societies bringing their economies into trade balance, since the level of ongoing global growth would obviously be lower, and I am not really convinced that this would be especially desireable as an end result.

I certainly have no idea whether Iceland is about to go but given the recent events investors would be wise to keep an eye out. Moreover, any longterm structural bullishness on Iceland clearly need to take the proverbial part as wing man in what is about to unfold since at the moment it is all about animal spirits as Keynes famoulsy articulated it. To end, after all, on an analytical note I would argue that the underlying external position of Iceland seems to be in a better shape than the ones we are seeing in Eastern Europe but that does not mean that any rapid adjustment won’t be tough since the size of Iceland’s economy virtually gurantees that it would be a swift kill for risk averse international investors and punters alike.

Okay, Geert Wilders’ movie Fitna is finally online. It was posted sometime yesterday and the English version has already been viewed over two million times. As I write this the Dutch version is at 2.5 million views. Talk about word-to-mouth!

First, the good news. Wilders did not do anything really stupid and really irresponsible like tear up or otherwise damage or deface the Koran. In other words, there is no reason whatsoever why someone should want to kill him or anybody else over this*. Besides, it turns out there already has been more than enough ado about nothing.

The sixteen minute movie is essentially a copy-and-paste job with verses of the Koran followed by images and speeches of violence and hate in the name of Islam. A good thing about the film is that, at the end, Wilders addresses the Muslim community, or his vision of this community, to tackle the problem of Islam-inspired violence. He does not advocate non-Muslim violence against Islam. The problem with Fitna is that its vision of Islam is terribly one-sided and limited. The movie, basically, could have been made by your average blogger. There is some truth in it, but it gets mixed up with a great number of simplified associations and generalizations.

Anyway, these are my first thoughts. I am writing this in the middle of the night and I think I should have another look at the movie when my mind is well-rested. In the meantime I am looking forward to comments from our readers. You can view Fitna at LiveLeak.com (or here in case of high traffic) and embedded below. Francophone readers can click here. For the time being, I’ll post any updates in the comments section.

*Disclaimer: I do not believe anybody should ever be killed or hurt over an expressed opinion. I wrote this with some of the death threats that Wilders has received in mind.

UPDATE: LiveLeak apparently had to nix the flick but you can still watch it HERE or HERE. Threats suck and are so pre-internets. Plus, they give the movie more credit than it deserves. I am providing the mirror links because now it really has become an issue of freedom of speech. And sadly so.

Astonishing therefore that people are really seeing this film as soft. Are we used already to all the violence that is depicted, donâ€™t we think that using lies, distortions and so on is a problem? It is an irresponsible form of abusing the freedom of speech, not only towards Muslims but also with regard to the people who voted for Wilders. I have spoken to some of them in the past and they have put their faith in him as the one who perhaps could solve the problems they experience. What Wilders has done know is behaving like a charlatan who sells rubbish, nonsense and a pack of lies and something that probably will not solve any problem.

Via the invaluable B92 website comes a nasty little story from Albania.

In her book, â€œThe Huntâ€, to be published in Italy on April 3, the former Hague Tribunal Chief Prosecutor Carla Del Ponte states that, during investigations into war crimes committed by the Kosovo Liberation Army, KLA, against Serbs and other non-Albanians, the prosecutorâ€™s office was informed that persons who disappeared during the Kosovo conflict were used in organ smuggling operations.

Two weeks ago I wrote about how Macedonia’s goverment had collapsed. Well, over the weekend it un-collapsed — PM Gruevski’s party and the Albanians reached an agreement and they’re coming back in office.

For now.

At least one Albanian minister seems to have resigned in protest over the deal, which suggests the Albanians aren’t getting much of what they wanted. More in a bit, perhaps.

In other Macedonian news, Greece continues to insist that they’ll veto Macedonia’s NATO membership next month if no agreement is reached on the name issue. Since “agreement”, to the Greeks, means “you can’t ever call your country by its actual, you know, name“, this is unlikely.

That probably deserves a post of its own, except that the Macedonia name issue is so stupid that it’s almost physically painful to write about it. Maybe sometime.

Nicolas Sarkozy was in Cherbourg to name the latest French SSBN, the appropriately named Le Terrible, this week; and he had a few things to say about the circumstances under which she might be called on to fire her M51 SLBMs. The headline grabber, which everyone picked up on, was that France is going to reduce the number of operational nuclear weapons it declares to the world; specifically, the airborne component of the French deterrent is being cut by one-third in terms of warheads.

France, until not long ago, operated a nuclear triad; as well as the first class of submarines, there were also four air force squadrons assigned to the nuclear mission, originally with the Mirage IV-A bomber and then with the Mirage 2000-N, and a force of intermediate-range ballistic missiles based in southern France. These weapons were withdrawn at the end of the cold war; they were always slightly odd with regard to France’s overall policy, as due to their range their only credible target was Russia. Officially, of course, the French nuclear force has always been “tous azimuts” or omni-directional (i.e. could point west, or maybe even north:-)).

The reduction, however, is entirely in keeping with the long-term principles of French nuclear strategy; France, like Israel and the UK (although the UK doesn’t have a published doctrine), has a traditional policy of minimal deterrence. This argues that nuclear weapons are subject to diminishing returns; the consequences of having all your cities nuked once are not noticeably better than twice, three times, or more, so the certainty of retaliation is much more important than its scale. “Superiority” is probably meaningless, and anyway uneconomic if not actively dangerous. This was also the doctrine associated with the US Navy in the 1950s, as opposed to the US Air Force; it was much more important to have a very secure retaliation force than a massive first-strike force, which was certain to be perceived as aggressive and threatening, and by happy accident this policy would involve heavy investment in the Navy’s submarines and carriers.

Despite this, Sarko is trying to frame the change in opposition to Jacques Chirac’s speech in 2006 in which he suggested that deterrence extended beyond a direct nuclear threat to the Republic; his press-cat describes this as a return to the fundamentals of deterrence. Beyond that, he also suggested a “dialogue” on the role of nuclear weapons in European security; well, I suppose he had to say something more, as this is an idea that gets taken out for a stroll every 20-30 years without effect. The speech is here; as far as detail goes, he sticks closely to tradition in refusing to define “vital interests” precisely (so not so much difference from Chirac, then) and stating that the force is targeted on a counter-value policy, i.e. against cities rather than against nuclear weapons systems.

As far as the practicals go, France has some 60 airborne nuclear weapons, of which 50 are ASMP(A) cruise missiles and 10 freefall bombs; this happens to match the number of Mirage 2000N aircraft on line precisely, mirroring the original and highly aggressive concept of operations from the 1960s, which foresaw launching the whole bomber force, if necessary on one-way missions to reach more distant targets. The mathematical geniuses this blog is known for will no doubt spot that this will fall to 40; the French Air Force and Naval Aviation have currently got 120 Rafales on order out of 294 planned, all of which are capable.

The reduction doesn’t go quite as far as the UK’s decision to withdraw all the WE177 nuclear bombs from the RAF in 1998, which accounted for all the UK’s airborne and tactical nuclear weapons. However, it’s worth pointing out that the British and French jointly developed an air-launched missile recently; in British service it’s called a Storm Shadow. Some voices in the UK have suggested acquiring a supply of these with nuclear warheads as a substitute for the Trident missile submarines that would be cheaper and less dependent on the US; the argument is based on experience since 1991 that surface-to-air missile defences are considerably less fearsome than was thought in the 1960s.

However, the UK government has been notably unwilling to engage with the idea. Its recent white paper on the deterrent cited only two alternatives to Trident (or disarmament), one of which was to independently develop an ICBM and find bases inside the UK, and one was to procure very long range nuclear cruise missiles (which would need developing) and base them on large airliner-type planes (the range because these could not go in reach of enemy air defences). This can only realistically be seen as an exercise in closing down the debate.